Updated for tax year 2026
No Tax on Overtime: The Complete Guide
The One Big Beautiful Bill Act created a federal income tax deduction for overtime pay, effective for tax years 2025 through 2028. This guide explains exactly how it works, who qualifies, the dollar limits, and how to claim it — with every figure tied to IRS guidance.
What "no tax on overtime" actually means
Despite the name, overtime is not tax-free. The law creates a federal income tax deduction (new IRC §225) for qualified overtime compensation, claimed below-the-line on Schedule 1-A. Three things remain fully taxed: Social Security, Medicare, and state/local taxes. What changes is your federal income tax bill — the deduction lowers your taxable income when you file.
Crucially, only the premium half of FLSA overtime qualifies. If you earn $20/hour normally and $30/hour for overtime, only the extra $10/hour — the half in time-and-a-half — counts toward the deduction. The $20 base portion does not.
The numbers that matter
| Rule | Single / Head of Household | Married Filing Jointly |
|---|---|---|
| Maximum deduction | $12,500 / year | $25,000 / year |
| MAGI phaseout starts | $150,000 | $300,000 |
| Phaseout rate | −$100 of deduction per $1,000 of MAGI over the threshold | |
| Deduction fully gone at | $275,000 MAGI | $550,000 MAGI |
Example: a single filer with $165,000 MAGI and $12,500 of qualified premium: excess MAGI = $15,000 → reduction = 15 × $100 = $1,500 → final deduction = $11,000.
Who qualifies
Four requirements, all must hold:
- Nonexempt under the FLSA — you must be eligible for overtime under federal law. Exempt salaried workers (executive, administrative, professional exemptions) do not qualify. Most independent contractors and gig workers do not qualify either — the rare exception is a worker treated as an independent contractor for tax purposes who is an employee under the FLSA, whose qualified overtime can be reported on Form 1099-NEC or 1099-MISC.
- Valid Social Security number authorizing work.
- MAGI under the phaseout — the deduction shrinks above $150K single / $300K joint and disappears at $275K / $550K.
- Married couples must file jointly. Married filing separately does not qualify at all.
What does NOT qualify
- Overtime required only by state law beyond the FLSA (e.g., California daily overtime for hours under 40/week)
- Voluntary employer premiums above what the FLSA requires
- Overtime under collective bargaining agreements exceeding FLSA requirements
- Shift differentials, weekend premiums, standby or on-call pay
- Double time: even where double time is paid, only the 0.5× FLSA premium counts
How to claim it
- Your employer keeps withholding federal income tax during the year — paychecks do not change unless you submit an updated Form W-4 accounting for your expected overtime deduction.
- Starting with 2026 W-2s, qualified overtime premium appears in Box 12, Code TT. (For 2025, the IRS allowed transition relief with reasonable reporting methods such as Box 14.)
- Claim the deduction on Schedule 1-A of your federal return. It works with the standard deduction; no itemizing needed.
- Keep your pay records — the premium must be documented if questioned.
Want your number first? Run the no tax on overtime calculator — it applies the caps and phaseout to your pay details instantly.
2025–2028 timeline
- 2025: law signed July 4, 2025, retroactive to January 1. Transition relief year for employer reporting.
- 2026: W-2 Box 12 Code TT reporting required. Rules in this guide.
- 2027–2028: deduction continues under current law.
- December 31, 2028: provision expires unless Congress renews it.
Common misunderstandings
- "My whole overtime paycheck is deductible." No — only the premium half.
- "My paychecks will get bigger." Not by itself — withholding doesn't change unless you submit an updated Form W-4 accounting for your expected overtime deduction; otherwise the benefit comes at filing.
- "It covers my state taxes too." No — federal income tax only. Most states, including California, still tax overtime fully.
- "Double time means double deduction." No — still only the 0.5× FLSA premium.
Frequently asked questions
Is overtime really tax-free now?
No. Overtime pay is still subject to Social Security, Medicare, and state taxes. The new law creates a federal income tax deduction for the qualified premium portion of FLSA overtime — up to $12,500 single or $25,000 married filing jointly — for tax years 2025 through 2028.
How much overtime is tax deductible?
Only the premium half of FLSA-required overtime: the extra 50% in time-and-a-half on hours over 40 per week. The deduction is capped at $12,500 per year single ($25,000 joint) and phases out above $150,000 MAGI single ($300,000 joint).
Do I need to itemize to claim the overtime deduction?
No. It is a below-the-line deduction claimed on Schedule 1-A, so it works whether you take the standard deduction or itemize. It reduces your taxable income, not your AGI.
What is qualified overtime compensation?
The portion of overtime pay required by the Fair Labor Standards Act and paid above your regular rate — in practice, the half-time premium on hours worked over 40 in a workweek. State-law-only overtime, voluntary premiums, and shift differentials do not count.
How will no tax on overtime work in 2026?
The same rules as 2025, with one big change: employers must separately report qualified overtime premium in W-2 Box 12, Code TT. For 2025 the IRS allowed transition relief with reasonable reporting methods.
Does the overtime deduction affect Social Security or Medicare tax?
No. FICA still applies to the full overtime payment. The deduction applies to federal income tax only.
Official sources
- IRS Fact Sheet FS-2026-13 (August 6, 2026) — 2026 reporting guidance
- IRS Notice 2025-69 — 2025 transition relief
- OBBBA §70202 / new IRC §225 — the statute
- U.S. Department of Labor — FLSA overtime rules
Last updated: October 2026 · Overtime tax calculator · About us